Deflation and poor demand impacts sales; Accumulate July 27, 2016 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Accumulate Price Rs308 Target Price Rs312 Implied Upside 1.3% Sensex 28,024 Nifty 8,616 (Prices as on July 27, 2016) Trading data Market Cap. (Rs bn) 540.9 Shares o/s (m) 1,759.1 3M Avg. Daily value (Rs m) 457 Major shareholders Promoters 68.08% Foreign 20.96% Domestic Inst. 4.42% Public & Other 6.54% Stock Performance (%) 1M 6M 12M Absolute (3.4) 29.7 3.8 Relative (9.6) 15.3 2.1 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 8.0 8.2 2.4 2018 9.1 9.4 2.8 Price Performance(RIC:DABU.BO,BB:DABUR IN) (Rs) 350 300 250 200 150 100 50 0 Jul 15 Sep 15 Nov 15 Source: Bloomberg Jan 16 Mar 16 May 16 Jul 16 Dabur Q1 sales have disappointed due to further slowdown in demand, PAN card issue with wholesalers and price deflation due to heightened competition. We expect meaningful acceleration in sales growth from H2, given expected benefits of monsoons and other Govt. initiatives. However, Dabur s intent to increase adspends and push sales will cap any meaningful expansion in margins. IBD should see revival led by expected revival in Namaste and initiatives in Africa. We are factoring in flattish margins and 14% PAT CAGR over FY16 18. Dabur remains a compelling play on recovery in rural demand and growing consumer affinity for natural products. We value the stock at 33xJune18 EPS and increase target price to Rs312 (302 earlier). We change our rating to Accumulate, given limited upside. Concall Highlights: 1) Consumer demand has seen further deceleration due to slowdown in rural demand 2) June has seen sharp reduction in growth as wholesale and retail channel partners had uncertainty regarding PAN card requirement for purchases in cash of Rs2lakh and above 3) Competitive intensity continues to remain high 4) Q1 Sales growth is 1.2% even as promotions have doubled on YoY basis which is now being netted of from sales as per IND AS 5) Adspends in Q1 was lower by 10% as Dabur continues to spend more on promotions; however, adspends are expected to revert to normal levels 6) Namaste had a flat sales due to currency devaluation and Geo political issues; however, with currencies now stabilising and localisation of supply in place its now expected to clock 5 10% sales growth with 10% margins 7) Juices category has now achieved back its peak market share in General and Modern trade; however, enterprise business will need 6 12 months of recovery time 8) Toothpaste continues to do well with a 200bps market share gain 9) Hair oils have witnessed 5% volume growth and gained share, sales declined 3% due to price deflation 10) OTC sales was impacted due to restructuring of distribution 11) Honey volumes grew 5% despite price based competition from Patanjali. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 78,272 84,540 95,737 109,348 Growth (%) 10.6 8.0 13.2 14.2 EBITDA (Rs m) 13,164 15,198 16,806 19,311 PAT (Rs m) 10,658 12,527 14,144 16,200 EPS (Rs) 6.1 7.1 8.0 9.1 Growth (%) 15.7 17.4 12.4 14.2 Net DPS (Rs) 2.0 2.5 2.9 3.4 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 16.8 18.0 17.6 17.7 RoE (%) 32.8 31.0 29.6 28.3 RoCE (%) 33.6 33.6 34.2 33.8 EV / sales (x) 7.0 6.5 5.7 5.0 EV / EBITDA (x) 41.5 36.0 32.4 28.2 PE (x) 50.7 43.2 38.4 33.6 P / BV (x) 16.1 13.0 11.1 9.4 Net dividend yield (%) 0.7 0.8 0.9 1.1 Source: Company Data; PL Research Q1FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q1FY17 Results Consolidated (Rs m): Sales grew only by 1.1%, 130bps margin expansion enables 11.8% Adj. PAT growth Y/e March Q1FY17 Q1FY16 YoY gr. (%) Q4FY16 FY16 Net Sales 19,284 19,071 1.1 19,840 77,797 Gross Profit 9,909 9,602 3.2 10,156 40,192 % of NS 51.4 50.3 51.2 51.7 Other Expenses 6,421 6,392 0.5 6,004 25,009 % of NS 33.3 33.5 30.3 32.1 EBITDA 3,488 3,210 8.7 4,152 15,183 Margins (%) 18.1 16.8 20.9 19.5 Depreciation 343 325 5.6 358 1,332 Interest 118 118 0.2 132 485 Other Income 610 477 27.8 539 2,172 PBT 3,637 3,244 12.1 4,201 15,538 Tax 701 620 13.1 868 2,999 Tax rate (%) 19.3 19.1 20.7 19.3 Minority interest 8 6 25.8 18 28 Adjusted PAT 2,928 2,618 11.8 3,315 12,512 Consolidated sales grew by 1.1% to Rs19.28bn led by 4.1% volume growth in domestic FMCG business. Sales growth was impacted by regulatory uncertainty at the wholesaler and retailer level, demand slowdown and competitive pressure in domestic markets and disturbances in Middle East and Africa. Gross margins expanded 110bps due to benign input costs. EBITDA margins expanded 130bps as 110bps increase in staff costs and 30bps increase in other expenses was neutralised by decline of 160bps in adspends. EBITDA increased by 8.7% to Rs3.48bn. Adj. PAT increased 11.8% to Rs2.92bn as tax rate increased by 20bps to 19.3%. Standalone sales remained flat at Rs12.7bn. 130bps margin expansion and 32.9% higher other income, coupled with 33.4% lower interest cost, enabled 14.2% Adj.PAT growth. Dabur launched honey based fruit spreads and VOLO sparkling fruit based drinks in a niche market. International business grew by 6%.Organic international business grew 6.8% led by 25% growth in Egypt, 27.4% in Nepal and 17.5% in Turkey. International business was impacted by geo political issues in the Middle East and North African markets. Dabur acquired Discaria Trading (PTY) in South Africa for future expansion. Currently, the company doesn t have any business operations. International business contributed to 34% of consolidated sales. July 27, 2016 2
Exhibit 2: Volume growth impacted by demand slowdown 12.0 10.7 (%) 10.0 8.0 6.0 4.0 9.0 9.0 9.2 8.8 8.7 7.4 8.1 8.1 5.0 7 4.1 2.0 2.5 (2.0) (4.0) Jun 13 Sep 13 Dec 13 Mar 14 June 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Exhibit 3: Slowdown and price deflation impacts sales growth across categories sans Oral care Sales Growth (%) % of Sales 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY16 Hair Care 24.0 8.4 13.9 12.1 7.4 12.7 9.4 NA NA NA Hair Oils 20.0 7.1 0 12 7.4 13 14 2 8.2 (3.0) Shampoos 4.0 15.3 0 12.8 8 11.5 NA NA NA ve Health Supplements 12.0 21.6 10.1 13.5 13 1.2 9 7.1 N.A 0.0 Oral Care 16.0 8 8.1 11.3 11.6 17.5 18.7 10.5 18.3 11.6 Toothpaste 10.7 11.5 19 0 23.8 28.1 15.5 20.3 12.8 Foods 24.0 21.6 29 11.8 19.6 15.5 2.4 23.7 11.7 4.3 Digestives 6.0 11.3 12.3 11.6 11 1.7 1.6 2.4 6.5 ve Skin care 5.0 4.4 9.7 4 16.6 5.2 2.2 9.5 N.A N.A Home Care 6.0 14.7 10.2 16.2 12.1 12 12.4 8.4 19.3 2.0 OTC & Ethicals 7.0 4.4 7.5 8.8 7.7 16.7 10.8 7.5 7.1 ve Exhibit 4: Middle East and Africa impacted by geo political issues, SAARC grows by 22% led by Nepal, Hobi posts double digit growth IBD Sales Growth (%) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Organic Constant Currency 18 8.3 3.6 8.8 9.2 8.8 13.3 10.4 6.0 Egypt 28 28 29 21 NA NA 7 27.0 25.0 GCC 21 24 14 22 10 9 10 5.0 N.A Levant NA NA 17 21 22.2 NA NA NA N.A Bangladesh NA NA 16 18 7.3 2.7 15.2 8.4 N.A Nepal NA NA NA NA 14.4 15.3 NA 19.6 27.4 Turkey 22.2 14 8.5 17.5 North America 35 July 27, 2016 3
Dabur India Dabur Sustaining Innovations across geographies July 27, 2016 4
Income Statement (Rs m) Net Revenue 78,272 84,540 95,737 109,348 Raw Material Expenses 37,201 37,970 43,835 50,351 Gross Profit 41,071 46,570 51,902 58,997 Employee Cost 6,896 7,948 8,594 9,757 Other Expenses 21,012 23,424 26,502 29,929 EBITDA 13,164 15,198 16,806 19,311 Depr. & Amortization 1,150 1,338 1,462 1,635 Net Interest 401 480 252 195 Other Income 1,581 2,192 2,683 3,201 Profit before Tax 13,194 15,572 17,775 20,682 Total Tax 2,509 3,018 3,599 4,447 Profit after Tax 10,685 12,555 14,176 16,235 Ex Od items / Min. Int. 26 27 32 35 Adj. PAT 10,658 12,527 14,144 16,200 Avg. Shares O/S (m) 1,756.5 1,759.1 1,766.5 1,771.5 EPS (Rs.) 6.1 7.1 8.0 9.1 Cash Flow Abstract (Rs m) C/F from Operations 9,791 14,740 14,265 16,313 C/F from Investing (8,957) (6,280) (7,635) (9,273) C/F from Financing (3,093) (4,763) (3,553) (4,022) Inc. / Dec. in Cash (2,259) 3,697 3,077 3,018 Opening Cash 3,132 678 1,786 2,796 Closing Cash 873 4,374 4,862 5,814 FCFF 9,454 10,486 16,933 15,545 FCFE 9,708 11,063 12,521 15,045 Key Financial Metrics Growth Revenue (%) 10.6 8.0 13.2 14.2 EBITDA (%) 13.5 15.4 10.6 14.9 PAT (%) 16.5 17.5 12.9 14.5 EPS (%) 15.7 17.4 12.4 14.2 Profitability EBITDA Margin (%) 16.8 18.0 17.6 17.7 PAT Margin (%) 13.6 14.8 14.8 14.8 RoCE (%) 33.6 33.6 34.2 33.8 RoE (%) 32.8 31.0 29.6 28.3 Balance Sheet Net Debt : Equity 0.2 0.1 Net Wrkng Cap. (days) 21 12 17 18 Valuation PER (x) 50.7 43.2 38.4 33.6 P / B (x) 16.1 13.0 11.1 9.4 EV / EBITDA (x) 41.5 36.0 32.4 28.2 EV / Sales (x) 7.0 6.5 5.7 5.0 Earnings Quality Eff. Tax Rate 19.0 19.4 20.3 21.5 Other Inc / PBT 12.0 14.1 15.1 15.5 Eff. Depr. Rate (%) 4.5 4.9 5.0 5.2 FCFE / PAT 91.1 88.3 90.6 93.2. Balance Sheet Abstract (Rs m) Shareholder's Funds 33,541 41,601 48,763 57,755 Total Debt 7,336 7,912 3,500 3,000 Other Liabilities 769 982 953 1,059 Total Liabilities 41,646 50,495 53,216 61,815 Net Fixed Assets 19,274 19,946 20,156 20,521 Goodwill Investments 20,217 25,239 30,485 37,758 Net Current Assets 2,155 5,310 2,575 3,536 Cash & Equivalents 678 2,204 2,796 3,467 Other Current Assets 20,894 23,816 25,322 28,916 Current Liabilities 19,417 20,710 25,544 28,848 Other Assets Total Assets 41,646 50,494 53,216 61,815 Quarterly Financials (Rs m) Y/e March Q2FY16 Q3FY16 Q4FY16 Q1FY17 Net Revenue 20,962 21,270 19,840 19,284 EBITDA 4,045 3,782 4,152 3,488 % of revenue 19.3 17.8 20.9 18.1 Depr. & Amortization 329 323 358 343 Net Interest 124 109 132 118 Other Income 547 604 539 610 Profit before Tax 4,140 3,954 4,201 3,637 Total Tax 728 766 868 701 Profit after Tax 3,411 3,185 3,179 3,130 Adj. PAT 3,411 3,185 3,315 2,928 Key Operating Metrics Standalone Sales growth % 11.5 6.7 13.5 13.6 EBITDA growth % 13.7 13.7 14.7 14.0 Adj. PAT 7,865 9,091 10,233 11,617 Adj. PAT growth % 16.9 15.6 12.6 13.5 EPS 4.5 5.2 5.8 6.6 Subsidaries Sales growth % 8.6 8.2 15.6 15.6 EBITDA growth % 12.3 17.2 24.1 19.9 Adj. PAT 2,942 3,306 4,169 5,041 Adj. PAT growth % 14.3 12.4 26.1 20.9 EPS 1.7 1.9 2.4 2.8. July 27, 2016 5
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